Commentary

Inequality, Opportunity and The American Idea

By Paul Ryan

The economic hardships brought about by the financial crisis and the weak recovery have reopened our longstanding national debate over the meaning of the proposition that we are all created equal.

In the Founders' vision, the self-evident truth of this belief guaranteed all Americans equal rights to life, liberty, and the pursuit of happiness.

To Abraham Lincoln, who led America at a time when this belief was most gravely threatened, it meant the equality of opportunity — "the promise that in due time the weights should be lifted from the shoulders of all men, and that all should have an equal chance."

This belief in the equality of opportunity and upward mobility is central to the American Idea. But every generation engages in fresh debates over its meaning.

When times are tough — when businesses are closing and when workers are losing their jobs — America's commitment to equality of opportunity is called into question by those who argue for greater equality of outcomes.

That's when the temptation to exploit fear and envy returns — and many in Washington use the politics of class division to evade responsibility for their failures and to advance their own narrow political interests.

As these debates rage from the streets of our cities to the corridors of Washington, policymakers should carefully consider the meaning of the Founders' words.

What is the government's role in promoting and protecting equality? Should policymakers focus on equality of opportunity, or equality of outcomes? Should they seek to promote upward mobility and expand the economic pie for all groups, or instead to more equitably divide up a shrinking pie?

A recent report on income inequality from the Congressional Budget Office has added fuel to this debate. Those who favor greater equality of outcomes seized immediately on one of the report's key findings: Over the period studied, income inequality increased, and government policy became less redistributive.

Some have implied that this reduction in government income redistribution occurred as a result of large tax cuts for the wealthy and savage cuts to transfer programs for the poor. But that's not what you find when you read the CBO report. In fact, the opposite is closer to the truth.

First, over the period studied, federal income taxes actually became more progressive — including a spike in the progressivity of the tax code after 1986, which was the last time Congress enacted fundamental tax reform.

Lowering tax rates while eliminating shelters that are used overwhelmingly by upper-income taxpayers incidentally results in a more progressive federal income tax, but the more important point is that it creates the kind of economic growth that allows all income groups to prosper.

Second, as Social Security and Medicare grew in size, the distribution of government transfer payments became less progressive, causing a reduction in the share of transfers received by lower-income households.

The CBO found that in 1979, households in the lowest income quintile received 54% of all transfer payments. In 2007, those households received just 36% of transfers.

As the CBO put it, "Rapid growth in Medicare, which is not means-tested ... tended to shift more transfer income to middle- and upper-income households."

These findings point the way forward for policymakers currently grappling with our crushing burden of debt.

Pursuing tax reforms that promote economic growth, while reforming our entitlement system by giving more help to those who need it and less help to those who don't, would not only reduce the deficit, but also go a long way toward advancing the equality of opportunity that defines American idea.

To the extent that far too many Americans struggle with entrenched poverty at the bottom of the income distribution, the answer is certainly not more of the same redistributive policies that have failed the poor for decades.

Instead, policymakers should promote innovative reforms — including school choice and an enhanced focus on job training and lifelong learning — that help our poorest citizens grasp the top rungs of the ladder, coupled with pro-growth economic policies that result in greater opportunities for all.

A narrow focus on income inequality can serve to blind us from other forms of inequality that threaten us. Our enormous debt burden is saddling younger Americans with trillions of dollars in unfunded liabilities that will be required to finance benefits promised to older Americans.

The CBO's finding that Medicare and Social Security are directing an increasing share of government transfer payments toward retired individuals who are in middle- and upper-income households illustrates the unfairness of this generational inequality.

Our nation is also threatened by a form of political inequality that grows as government gains the power to equalize the outcomes of our lives.

Empowering a class of bureaucrats and connected crony capitalists to call the shots, rig the rules, and preserve their place atop society, only serves to disempower hardworking Americans, entrepreneurs, and the small businesswoman who has the gall to take on the corporate chieftain.

The most destructive path we can take is to focus on equalizing outcomes through redistribution instead of equalizing opportunities by reducing barriers to growth.

Of the few countries that have seen decreasing inequality over the past thirty years, one of them, Greece, is in the midst of a severe debt crisis and is teetering on the edge of economic collapse. This underscores the point that increased equality does not always mean better economic outcomes for all.